By Tiernan Ray

The show featured CEO Tim Cook and other executives discussing, and demo’ing, an update to the company’s MacBook Air laptops, and a streaming music service, dubbed “iTunes Radio,” both widely expected. There were also a bevy of new features for the next version of the company’s Mac operating system, dubbed “OS X Mavericks,” and a “sneak peek” of a long-awaited revamp of the “Pro” model of the Macintosh.

The show did not feature any news about new iPhones, contrary to speculation on Friday by ISI Group’s Brian Marshall that it might. It did offer the highly anticipated renovation of the iOS operating system for the iPhone, iPad and iPod Touch.

The software will not be made available until this fall, which, like the lack of a new iPhone unveiling, may have disappointed some individuals who see that time frame as indicating an extended way, possibly, for the new iPhones to arrive, after speculation they might become available this summer (though it’s certainly conceivable that new iPhone or iPad models could ship without the new OS.)

The Street reaction, as represented by seem notes from sell-side analysts, was largely favorable.

ISI’s Marshall, who has a Buy rating on the stock and a $600 price target, acknowledges his speculation about new hardware didn’t pan out, but he doesn’t seem disappointed this afternoon:

While we saw some possibility that AAPL could surprise the investment community with an iPhone announcement, this year’s WWDC was largely in-line with Street expectations. In our view, creating greater “stickiness” to the iOS platform (relative to Android) is nearly as important as releasing better hardware (e.g., larger display) as it is much easier to make up lost ground in the latter than in the former. We believe AAPL is accomplishing this mission here with very significant user interface enhancements and iTunes Radio providing almost a completely new experience to current users while we await upgraded hardware. Maintain Strong Buy and $600 PT.

Marshall writes of the new iOS 7 look,

While many have been downplaying the importance of this year’s WWDC due to a lack of new mobile device announcements, we believe AAPL wanted to focus attention on the iOS platform. In our view, users will find the interface modernization/enhancements (e.g., translucence, precision feel, gestures, etc.), improved built-in applications (e.g., weather, photos, calendar, car integration, etc.)

Topeka Capital Markets’s Brian White, who has a Buy rating on Apple shares, and an $888 price target, writes of the new iOS 7 look and feel,

We felt the refreshed user interface with iOS 7 was a big change through more striking colors, a simpler interface, translucency, new typography, full screen interface, “subtle motion” capability and more. Clearly, Jony Ive’s influence on iOS 7 was felt in a meaningful way with this release. Many new features come with iOS 7 and multi- tasking was one that we believe users will appreciate, along with AirDrop for peer-to-peer transfer, a new Siri voice (now in male and female), expanded Siri intelligence, iOS in the car and other new features.

White is encouraged by stats about the Apple ecosystem rattled off by Cook during the event:

During the keynote, Tim Cook provided statistics around Apple, including over 50 billion App downloads, over 900,000 Apps available (375,000 for the iPad), over 600 million iOS devices sold, over 575 million App accounts, over 300 million iCloud accounts, over 240 million GameCenter users and more than $10 billion paid to developers.

Piper Jaffray’s Gene Munster thinks the redesigned iOS will have more enduring impacts on user loyalty for Apple than will any new hardware:

While these announcements were largely expected, we believe that the improvements in iOS 7 should give iPhone users, and investors, a new reason to be excited about their iOS devices and subsequent new phones/tablets. At the end of the day, we believe iPhone users get over new hardware within a few hours when updating their phones, but the OS is what mesmerizes people longer term. Overall, we believe the event sets the stage for new products over the next 6 quarters including iPhone 5S, a cheaper iPhone, a television, iPhone 6, iWatch, and possibly a payments solution.

As for iTunes Radio, it is more important as a proof of Apple’s services ability than any actual money it will make, he writes:

If Apple’s music service were to equal Pandora’s Street revenue estimate in CY14 of $875m, it would add about 0.5% to overall revenue. More importantly, we view the music offering as an opportunity to show consumers that Apple can deliver new, useful services with great experiences to make up for disappointments in Mobile Me and Maps.

Mizuho Securities’s Abhey Lamba, who has a Buy rating on Apple shares, writes of iOS 7 that “the new features seem to be bridging the gap with other OSes and will help in driving Apple’s eco-system as they are likely to improve interoperability of various Apple devices.” However, “We continue to think that Apple needs to announce a new product category for significant upside to the stock while the upcoming product refresh should act as a near- term catalyst.”

Lamba adds with respect to the new laptops that “The new product, combined with enhancements to the operating system (OS X Mavericks), should help the company maintain its lead in the $1,000+ laptop category.”

There were also some Street observers who wrote in about the implications for Pandora Media (P), the Internet radio purveyor whose business seems directly threatened by ITunes Radio.

Pandora shares today weathered the storm well, however, and actually closed up 37 cents, or 2.5%, at $15.49.

RBC Capital’s Mark Mahaney, who has an Outperform rating on Pandora stock, sees strong competition from Apple, and notes that the cost of the iTunes Radio service that doesn’t have adds is $25 a year, representing the subscription price for Apple’s iTunes Match service, which is cheaper than the $36 yearly subscription cost for Pandora. But Mahaney keeps the faith that Pandora can “execute” well in a large and growing market:

The introduction of iTunes Radio increases competitive pressure on Pandora. Of all the major competitors on the market so far (Spotify, Google Play Music), iTunes Radio has the most similar use-case to Pandora, which means it will likely appeal to the same audience – those interested in a free, hands-off approach to music. That being said, we believe the market has long been anticipating an entrance from Apple, and the stock has been trading down in the weeks leading up to the announcement, so some amount of the downside may already be priced in. On the bright side, Apple’s entrance into the Internet radio world serves as a confirmation of the market opportunity that Pandora has recognized and developed. Also, Pandora is available on mobile platforms besides iOS, so for the time being it has more potential reach [...] We have confidence that Pandora can continue to execute against the large Internet Radio opportunity. The company may be at an inflection point in terms of both revenues and costs. Per our Q1:14 EPS note: When we initiated on P a month ago, we said that to get constructive we would have to see: 1. Continued strong usage metrics – check; 2. Sustained improvement in Mobile Monetization – check; and 3. A successful management transition – not checked, as the CEO Search continues. But, we believe Pandora is largely an execution story, so the CEO Search isn’t as critical. And the BIG POINT here is that we believe P has finally reached an inflection point in terms of both its Revenue Growth AND its Cost Structure. Getting leverage in Content Costs enables greater resources to be applied to growth investments. These are Cost Flywheels. That’s our pitch.

On the other hand, Lazard Capital’s Barton Crockett, who has a Neutral rating on Pandora shares, writes that while the competition from Apple isn’t as bleak as it perhaps might be, it still places Pandora in danger:

Apple’s iTunes Radio announcement lessens competitive fears for Pandora, but does not eliminate them. The main positives for Pandora are a launch in the fall (vs. some reporting of an earlier debut), and a feature set that at first glance does not appear to be a major advance. That said, Apple’s brand and consumer clout could garner meaningful share.

Crockett, reflecting on a Wall Street Journal article, thinks that Apple’s deal terms with major music labels could be a risk for Pandora:

Ahead of the event, the WSJ reported that Apple is agreeing to pay 50% of ad revenues for performance fees, and 10% for publishing fees. The publishing fee would be more than 2x the 4.3% Pandora paid in F2013. The performance fee would be similar to the nearly 53% we estimate that Pandora paid in F2013 as a percentage of total revenues. However, Pandora’s performance fees are fixed per song, so as per song monetization improves, margins can rise. If the WSJ report is literally correct — that Apple is paying a fixed 50% of revenues — then we think the Apple deal sets a benchmark that could be a headwind for Pandora’s margin ambitions. Specifically, if a fixed 50% of revenue cost structure were imposed on Pandora, it will likely not achieve its long-term goal of moving content costs down to 40% of revenues. We note this because the Copyright Royalty Board will set new performance fee rates after the current Webcaster settlement expires in 2015. The CRB will use new market benchmarks, such as Apple’s deals, when determining the new rate structure. The CRB process begins next year.

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There are 5 comments

JUNE 10, 2013 7:24 P.M.

LoveIt wrote:

Cannot wait to upgrade to iOS7. Even looking to buy a MacBook Pro because of the power saving features of the Mavericks OSX platform.

JUNE 10, 2013 7:53 P.M.

TheSluce wrote:

Lovelt: Ditto! iOS 7 looks totally amazing and with the way everything is easily cross utilized with Apple products I may just have to switch to OSx, too. Mavericks is really impressive and I am overall really impressed with Apple. As much as I have wanted to continue to love Microsoft my feelings for them are waning. And a 13-hour time on a MacBook Air ... that is sweet!

JUNE 10, 2013 8:26 P.M.

Anonymous wrote:

Wow! iTune Radio ... the best thing since sliced bread.

JUNE 10, 2013 8:40 P.M.

Anonymous wrote:

The new UI looks awesome. True, some of these features are on androidnandnwindows, but I see nothing wrong with listening to what users want and giving it to them. Airdrop is really cool. The look itself is elegant very high end looking.

Iradio doesn't seem revolutionary but i want to see the execution. If it is good, I will use it. 25 a year for ad free radio is worth it , less than a cups of coffee a month. I use Songza now but I will give I radio a spin.

JUNE 11, 2013 12:57 P.M.

Anonymous wrote:

as usual new Apple offerings will be underestimated at announcement.

the only annoying thing is that it will launch in fall. why give competitors 3-4 months to study your new offeirng and work to make it obsolete before it's launched?

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.